The Chicago fund tracker says the cut to the bronze level suggests positivity but lack of

September 30, 2014 — 4:27 AM UTC by Lisa Shidler

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Brooke’s Note: The pressure is on and these are career-making or breaking times. Whether you’re an RIA trying to decide whether to dump or add to positions in Total Return Fund or an analyst deciding to lower the rating or not, danger is everywhere. Too little reaction is potentially dangerous. Too much reaction could make you look dumb, too, if this all proves to be a non-event like when Steve Jobs left Apple. Morningstar seems to have deftly played it down the middle on this one hammering the rating down but saying good things about PIMCO and its fund all the while. PIMCO seems to be taking a similarly Middle Way approach to Bill Gross — deleting all his Tweets and removing any immediate links to his famed blog — but leaving those writings (not the tweets) in the archives. Also, it is leaving awards he is connected to in full view in its offices, according to Reuters.

When all hell was breaking loose for the PIMCO Total Return Fund last March — including a report that it had been beaten by 87% of its peers — Morningstar Inc. stood by its gold rating on the fund.

Not this time.

As if making up for lost time, the Chicago-based fund tracker lowered its rating on the Newport Beach, Calif.-based firm by two full levels, from gold to bronze, citing the departure of Bill Gross from PIMCO and the unintended consequences of that sudden exit. See: The real Bill Gross story with big help from the Wall Street Journal’s reporting.

“Given Bill Gross’s abrupt departure, investors have focused on the possibility that out-flows could wreak havoc on the portfolio. Snap estimates of expected outflows have been all over the map, but it seems likely that outflows could total in the tens of billions of dollars,” wrote senior analyst Eric Jacobsen about PIMCO’s Total Return Fund.

Still, Morningstar’s Jacobsen tried to write positively of the situation throughout his report, almost belying his stark bottom-line rating.

“The fund’s bronze Morningstar analyst rating reflects [our] high level of confidence in PIMCO’s resources and overall abilities but also the uncertainty as to exactly how all these parts will mesh in the wake of Gross’s departure.”

This is a similar view expressed by Charles Schwab & Co. to its investors, which offered tepid support of PIMCO.

“Gross was probably the most important individual at PIMCO and was the face of the organization. His departure matters, but PIMCO has a deep and capable investment staff.” the company writes on a Q&A with no byline.

The San Francisco-based company also writes: “The fund was removed from the Select List in April 2014 as Schwab’s proprietary mutual fund evaluation fell relative to other options in the intermediate term bond category,”

Positive uncertainty

One of the uncertainties that sparked the downgrade involves the possible exit of assets. Such outflows can lead to liquidity problems that would cause a write-down of the fund’s value if assets had to be sold at unfavorable prices.

“There’s no sure-fire way to predict how the fund will fare if the worst of these fears are realized but there are some indicators that it is well-positioned to weather a pretty large storm,” Jacobsen writes in his report. See: Just what damage was done — or not — by Bill Gross ranting in shades.

Indeed, he notes that the fund holds mostly highly liquid treasuries and other government securities (29%) and that PIMCO has a good track record liquidating holdings with the outflow of $70 billion of its assets between May 2013 and September 2014.

.A fund with a “gold” rating reflects the analyst’s highest level of conviction across five criteria. A fund with a “silver” rating has notable advantages across several, but perhaps not all, of the five areas that give the analysts a high level of conviction. A “bronze”-rated fund has advantages that outweigh the disadvantages across the five pillars. A fund with a “neutral” rating isn’t seriously flawed across the five pillars, nor does it distinguish itself very positively. A “negative” rated fund is flawed in at least one if not more pillars and is considered an inferior offering to its peers. The ratings get reviewed at least every 14 months. See: Morningstar explains its new forward-looking rating system — and tosses in some hot fund picks for good measure.

Bottoms up

Another uncertainty noted by Jacobsen is a novel balance of macro-level and micro-level analysts and their interactions with portfolio managers.

Translation: The masters of the universe are sharing power with drudges.

“The [investment committee] has shifted from being dominated by macro specialists to being more balanced with those focused on bottom-up analysis.”


Mentioned in this article:

Morningstar, Inc.
TAMP
Top Executive: Joe Mansueto



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Marty Morua said:

October 1, 2014 — 2:50 AM UTC

This one sentence in the article….......“Gross was probably the most important individual at PIMCO and was the face of the organization. His departure matters”...... reminds me of Apple and Jobs.

Steve Jobs was the face of Apple as well as being one of the most followed CEO’s of any industry. Iconic and beloved. Many thought if/when Steve passes, Apple will soon afterwards also fade away. Nope…. its still going strong with record iPhone sales.

PIMCO will survive. This is a bad speed bump but in the end, will work out.

Marty Morua


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